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October 13, 2008

 

By ANDREW ROSS SORKIN

 

 

Morgan Stanley was racing to salvage a crucial investment from a big Japanese bank on Sunday in an effort to allay growing fears about its future — negotiations so critical to the financial markets that they have drawn in both the Treasury Department and the Japanese government.

 

Morgan Stanley, one of the most storied names on Wall Street, was locked in talks on Sunday to renegotiate its planned $9 billion investment from the Mitsubishi UFJ Financial Group of Japan, according to people involved in the talks.

 

The completion of a deal might help calm markets worldwide, which sank last week because of escalating concerns about the fate of financial institutions like Morgan Stanley. Investors might read the investment as a sign of confidence in the bank’s future.

 

Mitsubishi was pressing for more favorable terms after Morgan Stanley lost nearly half its market value during last week’s stock market plunge.

 

Treasury, however, is not planning to have the United States government take a direct stake in Morgan Stanley as part of a broader effort to stabilize the financial industry and the markets, these people said. Wall Street had buzzed Friday that such a move might be unavoidable.

 

Morgan Stanley is in the midst of the gravest crisis in its 74-year history, even though analysts estimate that the bank has more than $100 billion in capital. Morgan Stanley’s shares price has plunged nearly 82 percent this year, closing at $9.68 on Friday.

 

Last month, Mitsubishi agreed buy about 21 percent of Morgan Stanley. The investment was to be made in the form of $3 billion in common stock, at $25.35 a share, as well as $6 billion in convertible preferred stock with a 10 percent dividend and a conversion price of $31.25 a share.

 

Under the proposed new terms being discussed on Sunday, Mitsubishi would still buy roughly 21 percent of Morgan Stanley, these people said. But all of the investment would be through preferred shares, with a 10 percent annual dividend. Many of those shares would be convertible into common stock, but the Japanese bank was trying to set a conversion price far lower than originally proposed.

 

Morgan Stanley and Mitsubishi have been in constant contact with government officials this weekend, these people said.

 

Mitsubishi and the Japanese government have sought assurances from the Treasury Department that if the United States were to decide to inject money into Morgan Stanley at a later time — a possibility some analysts do not rule out — that such a move would not wipe out preferred shareholders. The Treasurey has indicated that it might use some of the $700 billion bailout package to take direct stakes in banks, but it has not spelled out how it would do so.

 

Investors suffered deep losses when the government effectively nationalized the nation’s largest mortgage finance companies, Fannie Mae and Freddie Mac. It is unclear how far those discussion have gone or whether any such assurances would be forthcoming.

 

Henry M. Paulson Jr., the Treasury Secretary, has pushed both companies to come up with a private-market solution and has indicated that he does not believe that Morgan Stanley needs capital from the United States government. However, he privately hinted to members of both companies that the government would back Morgan Stanley if it came to that, these people said, suggesting that he does not want to repeat the troubles that resulted from allowing Lehman Brothers to go bankrupt.

 

George Soros, the billionaire investor, wrote in a column in The Financial Times that Morgan Stanley needs to be rescued by the U.S. government.

 

“The Treasury should offer to match Mitsubishi’s investment with preferred shares whose conversion price is higher than Mitsubishi’s purchase price,” Mr. Soros wrote. “This will save the Mitsubishi deal and buy time for successfully implementing the recapitalization and mortgage reform programs.”

 

While the negotiations remained fluid, people close to both sides expressed confidence that a deal would be struck. The companies are hoping to announce the terms of the transaction and Mitsubishi’s commitment to complete the deal by Monday morning, before the stock market open in the United States.

 

Over the past week, Mitsubishi and Morgan Stanley have issued statements insisting that they planned to complete the deal on the original terms. Spokespeople for Mitsubishi and Morgan Stanley declined to comment on Sunday.

 

Morgan Stanley converted itself into a bank holding company one week after Lehman Brothers collapsed last month. That business model makes it easier for Morgan Stanley to borrow from the Federal Reserve. The firm has also lowered its gross leverage levels to under 20 times.

 

Mitsubishi has large ambitions for expansion into the United States. It recently purchased the remaining shares of UnionBanCal, a bank in California, for a premium over its share price. Mitsubishi had owned the majority of UnionBanCal since 1996.

 

Edmund L. Andrews and Eric Dash contributed reporting.

 

http://www.nytimes.com/2008/10/13/business/13morgan.html?_r=1&hp&oref=slogin

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